Thursday, January 17, 2013

Pedal to the metal, mid-January update

Happy new year to all! Wow, since our November launch the LDP has really pushed the pedal to the metal, announcing huge money printing and fiscal stimulation in the form of repair for those bridges and tunnels to nowhere. All good for the equity markets in Japan. But what is different this time around, we ask sardonically. Will these infrastructure projects actually return a decent investment to the government? What will happen to JGBs when domestic demand dries up? How many years before Japan defaults? These are dark questions, but for the time being Japan outperforms primarily on the weak currency.

Needless to say, the currency sensitivity for Japan exporters is a large swing factor for corporates, particularly automobile and technology exporters. When we wrote our last blog update on November 29, the yen had started to creep up from the Y78-80 range, but obviously not to the extent of Y89 to $1USD where it is today. Canon and Nikon are 2 of the most currency-sensitive tech names given their camera and other precision exports. Canon's OP moves about 3% of total OP for every Y1 move against the dollar and euro. Nikon's OP sensitivity is 2.4%. Thus, if the yen holds at Y89 for 2013 from Y79 in 2012, Canon's OP would rise about 30% YoY solely on the currency. Today's Nikkei mentioned that Canon's OP could rise 20% this year. We think this is on the low-end.

The current rally should last until the fiscal end year reporting season. Our rational: "buy on the mystery, sell on the history". Investors should be enticed by the sharp swing in profits for CY 2013, and bid up stocks in anticipation of strong forecasts for FY3/14, which will be released in April-May 2013. Until than, markets should be frothy assuming there aren't any other negative macro events. We suspect that investors will take profits in April-May or slightly before once the "news" of strong YoY earnings growth comes to fruition.

Just to update our views, we recommended buying Sharp, Nikon, and Tokyo Electron last year November 29. We did a round of tech visits in November and came away with warm fuzzy thoughts on these 3 names. See our note from Nov. 29 for more details.

  Sharp Nikon Tokyo Elec. TOPIX NIKKEI
29-Nov           169        2,186        3,375           779        9,400
18-Jan           344        2,655        3,815           911      10,913
return 104% 21% 13% 17% 16%

Sharp in particular seemed oversold and over-hated.

Since November 29, Sharp has doubled while the TOPIX is up 16%. Nikon is up 21%. TEL is up only 13%, and thus the laggard in the bunch. Intel's capex forecast announcement of $13bn for 2013 versus $11bn in 2012 is positive for TEL, Advantest, etc. Look for TEL and Nikon to continue to be bid up going into the end of year earnings (April-May).

Happy hunting and all the best in 2013!

For more thoughts, color, etc. feel free to contact me at or +81-90-7715-1777

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